Fiscal Sustainability of India’s National Food Security Act 2013

Abstract

Forward-looking approaches to fiscal sustainability generally assess the fiscal implications of future programme-specific expenditure. This article attempts to assess the future fiscal implications of the National Food Security Act (NFSA), 2013, for the Indian economy. The results, under the baseline scenario based on the projected debt–GDP ratio, indicate a modest increase till 2021–22 and then debt/GDP declines towards the current level of 70% in 2012–13, signifying fiscal sustainability. The dynamics of the projected baseline debt–GDP ratio are largely shaped by the provisions of the Act and underlying demographic factors during the projection horizon. Sensitivity analysis under different assumptions about productivity growth, the interest on government borrowing and primary deficit–GDP ratios show mixed results and hence provide necessary policy pointers towards restoring fiscal sustainability under the Act. Keeping the primary deficit–GDP ratio below 1.5 per cent through periodic upwards revisions in the issue price of food grains, as envisaged in the Act, coupled with higher productivity growth and lower interest on government debt, would ensure long-term fiscal sustainability of the Act.

JEL Classification: H24, H62, H68, J11, Q18

Keywords

Food Subsidy Fiscal Deficits Fiscal Projection Budget Deficits Demographic Transition Food Security

1. INTRODUCTION

Fiscal sustainability is a multi-dimensional concept. It incorporates government solvency, stable and robust growth, buoyant and stable tax regimes, capacity to absorb adverse macroeconomic shock and generational equity (OECD, 2009). There are different approaches to defining and assessing long-term fiscal sustainability in a country. For example, solvency of government and stability of key deficits and debt indicators are two desirable requirements of fiscal sustainability. Solvency requires that government repay all its liabilities either in the finite or infinite future in a dynamically efficient economy.¹ It crucially depends on currency composition, ownership pattern, the maturity profile of debt and overall macroeconomic health. Stability implies the debt–GDP ratio or deficit–GDP ratio either falls or remains constant over time to ensure macro objectives like growth and stabilisation. In a generational accounting framework, a fiscal policy is sustainable if the estimated ‘generational imbalance’ is non-positive. In the budget forecasting model, a fiscal policy is sustainable when the forecasted debt–GDP ratio does not explode in the context of projected revenues and expenditures or programme-specific expenditures or reforms.

However, in practice the assessment of fiscal sustainability mainly focuses on an analysis of backward-looking indicators or forward-looking indicators (UK’s HM Treasury Report, 2008). Assessment based on backward-looking indicators focuses on time-series analysis of historically given information about important fiscal and macro variables. Applying time-series econometric techniques, the stationary properties of discounted or undiscounted debt and deficits series, or cointegration between government revenue–GDP and expenditure–GDP series, or the functional response of the primary surplus/GDP to the debt–GDP ratio over time are checked. It implicitly assumes the continuation of historical trends and patterns of the relevant variables and empirical results in future, and accordingly addresses the issue of fiscal sustainability (Afonso, 2005; Bohn, 1998; Buiter and Patel, 1992). A major limitation of the backward-looking analysis is that it focuses on the past and says nothing about the future sustainability of fiscal policy. The forward-looking analysis focuses on the comprehensive projection of future expenditures and revenues of the government and their impact on future debt and deficits. As a forward-looking analysis focuses on the projection of important fiscal and macroeconomic variables, it entails wide-ranging indicators like demographic changes, productivity, growth of GDP, the interest rate on government borrowing and the impact of expected programme-specific expenditures.

In the present context, an attempt is made to assess the fiscal implications of India’s National Food Security Act (NFSA), 2013. By applying a forward-looking approach to fiscal sustainability, the present study attempts to assess the future fiscal implications of the Act. Concerns over the fiscal sustainability of the Act haunt policy makers in India, due to the gigantic financial burden of the existing food security system in India. The combined central and state government spending on the existing food subsidy as a share of total revenue deficits exceeded 25 per cent from 2004–05 to 2011–12.² Similarly, the share of spending on the food subsidy to total primary revenue expenditures and revenue receipts of both the central and state governments stood at 4.5 and 4.1 per cent, respectively, between 2004–05 and 2011–12, and the ratio of food subsidy to GDP has far exceeded the 1 per cent mark since 2008–09 (Government of India, 2013). Hence, it is imperative to study whether the provisions and implementation of the Act would be fiscally sustainable.³ In the present context, we define the Act as fiscally sustainable if its implementation does not cause the debt–GDP ratio to explosively increase from the current level of 70 per cent (revised estimate—RE) in 2011–12 (Government of India, 2013) over the projection horizon from 2013–14 to 2030–31.⁴

Pioneering research on empirically examining the future sustainability of public debt based on a particular fiscal structure in the global context can be found in Chouraqui et al. (1986), Blanchard et al. (1990), Auerbach (1994), HM Treasury Report of UK (2008), Fiscal Sustainability Report (2011) of the Government of Canada, and Miller et al. (2011) for Latin American countries. Most of these studies made projections of GDP based on projected population, labour force participation, labour productivity and international migration. Based on GDP projections, revenue and expenditure were projected using baseline values of revenue–GDP and expenditure–GDP ratios to derive baseline primary deficits–GDP ratios. For sensitivity analysis, expenditure–GDP ratios has been projected based on expected reforms, mainly because of population ageing, growing social security burden, etc. As the projection of the debt–GDP ratio crucially depends on primary deficits/GDP, borrowing cost to finance deficits and GDP growth rates, different hypothetical interest rates on borrowing, GDP or productivity growth rates and primary deficits/GDP have been assumed in the studies to provide necessary policy implications.

In the Indian context, official reports like the Reports of the Taskforce on the Implementation of the Fiscal Responsibility and Budget Management (FRBM) Act (2003) in 2004, Report of Twelfth Finance Commission (2004a) and Report of the Thirteenth Finance Commission (2010) mostly provide medium-term projections of key fiscal variables with specific objectives entrusted to them. Individual researchers like Pattnaik et al. (2004) have projected key fiscal variables to assess the sustainability of India’s fiscal policy with respect to fiscal rules like the FRBM Act for the central government and Fiscal Responsibility Legalisation (FRL) for state governments. Gulati et al. (2012) assessed the impact of the National Food Security Bill from three important perspectives—operational challenges, financial obligations and the macroeconomic impact of the large-scale increase in government expenditures needed to implement the Act. In the same context, Mishra (2013) argued that apart from the cost of the food subsidy, cost escalation due to the setting up of new institutions and bureaucracies to implement the Act in spirit would be substantial. However, both studies computed the financial implications of the Act based on one-year to three-year perspectives, without detailed computation of the financial burden on each targeted group with respect to their nutritional and food requirements.

Based on the key objective and review of literature, the focus of the study is to project the debt–GDP ratio of the combined central and state governments from 2013–14 to 2030–31 to assess the fiscal impact of the NFSA 2013 under a baseline scenario. Subsequently, sensitivity analysis will be carried out with respect to different productivity growth rates, interest rates and primary deficits to provide essential policy guidelines.

The organisation of the rest of the article is as follows. Section 2 briefly describes the salient features of the NSFA 2013. Section 3 depicts the analytical framework to assess the fiscal implications of the Act, while Section 4 presents the baseline values of required variables like GDP growth, borrowing costs and primary deficits/GDP. Section 5 illustrates the projection of the additional financial burden of the NFSA 2013 and its baseline fiscal impact on the projected debt–GDP ratios. Section 6 highlights the subsequent sensitivity analysis and the major conclusions and implications are in Section 7.

2. SALIENT FEATURES OF THE NFSA 2013

India’s National Food Security Act (NFSA) 2013 presents a paradigm shift in the country’s attempt to address the issue of food security—from currently a welfare-based approach to a rights-based approach. The main objective of the Act is to provide highly subsidised food grain to around 67 per cent of the country’s population (estimated at 1.24 billion in 2011). The provisions of the Act make it possibly the biggest experiment globally to distribute subsided food grain to ensure food and nutritional security. Implementing the provision of the NFSA 2013, in full depends on its long-term feasibility based on three distinct issues—fiscal burden, operational challenges and ramification on Indian agriculture (Basu, 2011; Gulati et al., 2012). However, the focus of the present study is an assessment of the fiscal burden of the Act. The fiscal burden is the additional expenditures over existing spending on the various existing food and nutritional security programmes.⁵

3. ANALYTICAL FRAMEWORK

To project the debt–GDP ratio, the following simple framework is developed. Let D_t and D_t_-1 be the stock of debt at periods t and t − 1. Y_t, g_t, r_t and PD_t are nominal GDP, its annual growth rate, the interest rate on government borrowing (i.e., bond yield) and primary deficits at period t, respectively. The inter-temporal budget constraint (IBC) of governments can be expressed as, D_t(1)r_tD_t–₁PD_t

Dividing (1) by GDP, the resultant equation can be re-written as, d_t(2)r_tg_td_t_–1pd_t

Thus to project the debt–GDP ratio (i.e., the future path of d_t in Equation 2), we need projected information on r_t, g_t and pd_t, as the debt–GDP ratio in the previous year (i.e., t − 1) is known. The future dynamics of the debt–GDP ratio depends on how the aforementioned elements evolve in future.

To assess the fiscal implication of NFSA 2013, we need to evaluate whether the additional expenditure over and above existing expenditure on food security and other welfare schemes like the mid-day meal (MDM) scheme and the Integrated Child Development Scheme (ICDS) would be sustainable or not. In other words, whether additional expenditure because of NFSA 2013, would make the debt–GDP ratio grow explosively in future or not. Accordingly, Equation (2) is modified as, d_t(3)r_tg_td_t_–1pd_tx_t

where x_t is the additional expenditure–GDP ratio over and above the existing spending on food security and other welfare schemes because of the NFSA 2013. Without x_t, pd_t in (2) takes into account existing spending on food security and other welfare schemes. Thus, the sum of pd_t and x_t in Equation (3) can be termed the modified primary deficit–GDP ratio because of NFSA 2013. In this context, it can be pointed out that as long as pd_t remains positive, x_t would be financed by debt or borrowing. Thus, apart from projecting, r_t, g_t and p_t, we need to project the value of x_t⁶ to evaluate the fiscal implications of the NFSA 2013.

4. BASELINE PROJECTED VALUES OF GDP GROWTH, INTEREST RATE AND PRIMARY DEFICITS/GDP

To assess the fiscal implications of the NFSA 2013, we need projected information on nominal GDP and its growth rate, interest rates, primary deficit–GDP ratios and additional spending over spending on existing food security and other welfare schemes.

4.1 Nominal GDP

To project the growth of real GDP, we need to assume that the economy stays in steady state, so GDP growth can be inferred from the growth rate of employment and labour productivity (Government of Canada, 2010). To project real growth rate of GDP, the following equations are used, Y(4)YLL

where Y = real GDP, L = labour employment and (Y/L) = average labour productivity.

Expressing (4) in growth rate form, we have, Y(5)tYytyLtL

where y = Y/L.

Equation (5) states that the growth rate of real GDP is equal to the sum of the growth rate of labour productivity and growth rate of employment. To project GDP growth rate from 2013–14 to 2030–31, we need the projected growth rates of labour productivity and employment. The growth rates of employment and labour productivity have been projected based on the projected workforce for India from 2013–14 to 2030–31 by the UN Population Division (2011) and the Asian Productivity Organization (APO, 2012) respectively. The average of labour productivity growth as reported by the APO (2012) from 2000–05 to 2005–10 has been assumed to remain fixed at 5.5 per cent during the projection period. The nominal GDP growth rate is obtained by adding the wholesale price index (WPI) inflation at 5 per cent per annum to real GDP growth rate (Table 1).

4.2 Interest Rate

One way of projecting interest rates on government borrowing is to take the combined decadal average of the bond yield of the central and state governments. The other way of projecting interest rate is to compute the long-run average of effective interest rates defined as the ratio of total interest payments in a year to the total stock of debt in the previous year. In India since 1997–98, automatic monetisation of the deficit ceased to exist and the cost of borrowing has been largely market-determined. Due to the growing importance of long-term debt financing as an important objective of debt management policy in India, it is logical that the average of the central and state governments’ long-term bold yield and effective average interest rate would converge. This argument gets support when one computes the decadal average of bond yield and effective average interest rate, which stood at 8.3 per cent and 8.07 per cent, respectively, from 1999–2000 to 2009–10.

Table 1
Projected Real GDP Growth and Nominal GDP (2010–11 to 2030–31) (%)

Year Labour Productivity Growth Rate Growth Rate of Employment Real GDP Growth Rate Average WPI Inflation Nominal GDP Growth Rate

2013–14 to 2014–15 5.5 1.74 7.24 5 12.24

2015–16 to 2019–20 5.5 1.4 6.9 5 11.9

2020–21 to 2024–25 5.5 1.2 6.7 5 11.7

2025–26 to 2029–30 5.5 1.01 6.51 5 11.51

2030–31 5.5 1.01 6.51 5 11.51

Year	Labour Productivity Growth Rate	Growth Rate of Employment	Real GDP Growth Rate	Average WPI Inflation	Nominal GDP Growth Rate
2013–14 to 2014–15	5.5	1.74	7.24	5	12.24
2015–16 to 2019–20	5.5	1.4	6.9	5	11.9
2020–21 to 2024–25	5.5	1.2	6.7	5	11.7
2025–26 to 2029–30	5.5	1.01	6.51	5	11.51
2030–31	5.5	1.01	6.51	5	11.51

Source: Author’s computation based on UN Population Division—2010 Revision and Asian Productivity Organization’s Productivity Data Book—2012 data.

There are arguments in favour of using the effective interest rate as it is neutral to the maturity structure of debt. The bond yield, even if it is long term, varies depending on maturity structures, currency composition, liquidity, etc. But bond yield figures indicate soundness of fiscal health and credit worthiness of the government, which might not be possible to deduce from the simple computation of effective interest rates on government debt. Based on this premise, it is reasonable to assume that the average of the effective interest rates and the long-term bond yield from 1999–2000 to 2010–11 would remain constant at 8.2 per cent during the projection period.

4.3 Primary Deficits/GDP

Primary deficits are the difference between the fiscal deficits and interest payments. Interest payments depend on the stock of debt, and their future path is determined by the interest rate on existing debt and on fresh borrowing to finance deficits. However, in Section 4.2, it is assumed that the average interest rate on government borrowing is around 8.2 per cent per annum during the projection period. Thus, the exercise left is the primary deficit–GDP, which is the difference between non-interest expenditures and total non-debt creating revenue and capital receipts. Therefore, to project the primary deficit–GDP ratios, it is important to focus on the different components of non-debt creating receipts and non-interest expenditures.

Table 2 provides a detailed summary of the different components of revenue, spending and deficits as percentages of GDP. In the revenue structure, tax and non-tax sources of revenue on average contribute around 86 per cent and 14 per cent of total revenue receipts, respectively, from 1990–91 to 2010–11 (Table 2). Indirect tax and direct tax contributed, respectively, around 77 per cent and 33 per cent to total tax revenue during the same period. However, the contribution of direct and indirect taxes has changed over the years. There has been a substantial increase in direct tax buoyancy between 1991–95 and 2006–10 due to an almost three-fold increase in personal income tax and corporate tax collections. At the same time, there has been a decline in the contribution of indirect taxes during the same period due to the WTO-led reforms and rationalisation of customs tariffs causing reduction in customs revenue. The average tax–GDP ratio from 1990–91 to 2009–10 stood at around 15 per cent. The collection of both the taxes depends on the tax base (i.e., the GDP) and tax rates. The high revenue buoyancy of direct taxes reflected in the higher contribution of income tax and corporate tax from 2005–06 to 2009–10 is unlikely to hold in future, as argued by the report of the Thirteenth Finance Commission. It will be moderated in future due to the moderation in GDP growth in recent years and ongoing direct tax reforms in the form of the Direct Tax Code (DTC), which seek to simplify tax laws, and reduce tax rates and compliance costs, will increase the exemption limit of income tax and reduce corporate tax rates. The Report of the Committee on the Roadmap for Fiscal Consolidation (Government of India, 2012) supported the earlier view and expressed their concern about the revenue loss from implementation of the DTC. Given this premise, it is reasonable to assume that the direct tax–GDP ratio during the projection horizon will be around 4.6 per cent which is the average of the direct tax–GDP ratio from 2000–01 to 2009–10.

Table 2
Average Revenues, Expenditure and Deficits as a Percentage of GDP for the Combined Central and State Governments (1990–91 to 2009–10)

1990–91 to 1994–95 1995–96 to 1999–00 2000–01 to 2004–05 2005–06 to 2009–10 2000–01 to 2009–10 1995–96 to 2009–10 1990–91 to 2009–10

Total Revenue 16.61 16.26 16.93 19.24 18.09 17.48 17.26

Tax 14.57 13.7 14.58 16.46 15.52 14.91 14.83

of which Direct Tax 2.45 2.86 3.59 5.6 4.60 4.02 3.63

Income tax 1.02 1.21 1.45 1.91 1.68 1.52 1.40

Corporate tax 1.13 1.36 1.96 3.51 2.74 2.28 1.99

Indirect Tax 12.12 10.84 10.99 10.86 10.93 10.90 11.20

Customs 2.99 2.63 1.83 1.78 1.81 2.08 2.31

Union excise 3.89 3.11 3.45 2.35 2.90 2.97 3.20

Service tax N.A 0.09 0.23 0.9 0.57 0.41 0.41

State excise 0.83 0.71 0.72 0.74 0.73 0.72 0.75

State sales tax/VAT 3.15 2.88 3.4 3.56 3.48 3.28 3.25

Stamp and registration fees 0.41 0.44 0.52 0.69 0.61 0.55 0.52

Non-Tax 2.61 2.41 2.61 2.67 2.64 2.56 2.58

Total Expenditures 25.27 24 25.78 26.14 25.96 25.31 25.30

of which Total defence 2.4 2.21 2.25 2.05 2.15 2.17 2.23

Defence (revenue) 1.67 1.62 1.56 1.26 1.41 1.48 1.53

Interest payments 4.65 5.07 6 5.17 5.59 5.41 5.22

Employee compensations N.A N.A 6.82 6.36 6.59 N.A N.A

Pension & other retirement benefits 0.98 1.3 1.7 1.73 1.72 1.58 1.43

Social security and welfare benefits 0.64 0.69 0.63 0.99 0.81 0.77 0.74

Food subsidies 0.47 0.48 0.8 0.74 0.77 0.67 0.62

Fertiliser subsidies 0.64 0.45 0.4 0.82 0.61 0.56 0.58

Food + fertiliser subsidies 1.11 0.94 1.2 1.56 1.38 1.23 1.20

Revenue Expenditure 20.78 20.8 22.6 22 22.30 21.80 21.55

Non-interest Revenue Expenditures 16.14 15.17 16.61 16.81 16.71 16.20 16.18

Capital Expenditure 4.49 3.17 3.18 4.16 3.67 3.50 3.75

Non-interest Expenditure 10.31 9.17 9.9 19.5 10.2 9.85 10

Fiscal Deficit 8.66 7.72 8.85 6.9 7.88 7.82 8.03

Revenue Deficit 4.17 4.55 5.67 2.73 4.20 4.32 4.28

Primary Deficit 4.01 2.65 2.87 1.73 2.30 2.42 2.82

	1990–91 to 1994–95	1995–96 to 1999–00	2000–01 to 2004–05	2005–06 to 2009–10	2000–01 to 2009–10	1995–96 to 2009–10	1990–91 to 2009–10
Total Revenue	16.61	16.26	16.93	19.24	18.09	17.48	17.26
Tax	14.57	13.7	14.58	16.46	15.52	14.91	14.83
of which Direct Tax	2.45	2.86	3.59	5.6	4.60	4.02	3.63
Income tax	1.02	1.21	1.45	1.91	1.68	1.52	1.40
Corporate tax	1.13	1.36	1.96	3.51	2.74	2.28	1.99
Indirect Tax	12.12	10.84	10.99	10.86	10.93	10.90	11.20
Customs	2.99	2.63	1.83	1.78	1.81	2.08	2.31
Union excise	3.89	3.11	3.45	2.35	2.90	2.97	3.20
Service tax	N.A	0.09	0.23	0.9	0.57	0.41	0.41
State excise	0.83	0.71	0.72	0.74	0.73	0.72	0.75
State sales tax/VAT	3.15	2.88	3.4	3.56	3.48	3.28	3.25
Stamp and registration fees	0.41	0.44	0.52	0.69	0.61	0.55	0.52
Non-Tax	2.61	2.41	2.61	2.67	2.64	2.56	2.58
Total Expenditures	25.27	24	25.78	26.14	25.96	25.31	25.30
of which Total defence	2.4	2.21	2.25	2.05	2.15	2.17	2.23
Defence (revenue)	1.67	1.62	1.56	1.26	1.41	1.48	1.53
Interest payments	4.65	5.07	6	5.17	5.59	5.41	5.22
Employee compensations	N.A	N.A	6.82	6.36	6.59	N.A	N.A
Pension & other retirement benefits	0.98	1.3	1.7	1.73	1.72	1.58	1.43
Social security and welfare benefits	0.64	0.69	0.63	0.99	0.81	0.77	0.74
Food subsidies	0.47	0.48	0.8	0.74	0.77	0.67	0.62
Fertiliser subsidies	0.64	0.45	0.4	0.82	0.61	0.56	0.58
Food + fertiliser subsidies	1.11	0.94	1.2	1.56	1.38	1.23	1.20
Revenue Expenditure	20.78	20.8	22.6	22	22.30	21.80	21.55
Non-interest Revenue Expenditures	16.14	15.17	16.61	16.81	16.71	16.20	16.18
Capital Expenditure	4.49	3.17	3.18	4.16	3.67	3.50	3.75
Non-interest Expenditure	10.31	9.17	9.9	19.5	10.2	9.85	10
Fiscal Deficit	8.66	7.72	8.85	6.9	7.88	7.82	8.03
Revenue Deficit	4.17	4.55	5.67	2.73	4.20	4.32	4.28
Primary Deficit	4.01	2.65	2.87	1.73	2.30	2.42	2.82

Source: Author’s computation based on Indian Public Finance Statistics (issues from 1994–95 to 2011–12) and RBI (2012).

Similarly, for indirect taxes, there will be slight reduction in the contribution of customs revenues due to the phasing out of protectionism and a move towards the Association of Southeast Asian Nations (ASEAN) tariff levels in the coming years (Government of India, 2004b). Besides, there is an ongoing reform in indirect taxes in the form of the Goods and Service Tax (GST). Being revenue-neutral in principle, the GST is expected to stabilise collection of indirect taxes. However, according to the Thirteenth Finance Commission report, implementation of the GST would boost overall revenue in the coming years. Thus, the higher revenue buoyancy of the GST would compensate or outweigh the fall in customs revenue. Based on this, it is reasonable to assume that during the projection horizon, the contribution of indirect taxes would be around 11.2 per cent of GDP, which is the average contribution between 1900–91 and 2009–10. Non-tax revenue would maintain or increase its contribution of around 2.64 per cent of GDP, which is the average contribution since 2000–01 to 2009–10, due to the growing importance of disinvestment and higher realisation of dividends from public sector undertaking in recent years.

On the expenditure side, total expenditures are classified into revenue and capital expenditures. To determine primary deficits, it is more important to focus on non-interest revenue expenditures and capital expenditures. There are numerous components of items under non-interest expenditures, most notables being spending on defence, compensation of employees, pensions and other retirement benefits, major subsidies and others. It is extremely difficult to project each item. Moreover, considering the objective, scope and simplicity of this study, it is not attempted to project every components of non-interest expenditure. For the purpose of the study, the average of the non-interest revenue expenditure-GDP ratio, which stands at 16.8 per cent from 2005–06 to 2009–10 is assumed to remain fixed during the projection horizon. Ongoing expenditure reforms especially by the central government, to limit subsidies (and eliminate petroleum and diesel subsidies in recent times), target intended beneficiaries and direct cash transfers to reduce wastage, and other efforts to reduce non-plan expenditures would certainly have a downward pressure on total non-interest spending. However, experience in the past shows that attempts to cut central government expenditures are mostly sporadic in nature and do not cause any substantial decline in total expenditures.⁷ Given past experience, the average ratio of non-interest expenditures-GDP is assumed to remain at 16.8 per cent during the projection horizon.

Capital expenditure in India is very meagre, averaging of 3.75 per cent of GDP from 1990–91 to 2009–10. Capital expenditure fell from 4.5 per cent of GDP from 1991–95 to around 3.18 per cent of GDP between 1996 and 2000, and remained stagnant at 3.17 per cent during 2001–05 due to the objectives of structural adjustment and a stabilisation programme aiming at reducing budget deficits. However, the adjustment programmes reduced capital expenditures because of high committed spending in the budget. There was a reversal of the falling capital expenditures from 2005–06 to 2009–10, mainly due to higher revenue realisation and pursuing the objectives of the FRBM for the central government and the FRL for state governments to eliminate revenue deficits and invest in critical infrastructure facilities to sustain higher growth. Thus, it is reasonable to assume that capital expenditures would be around 4.2 per cent of the GDP, which is the average capital expenditure from 2005–06 to 2009–10.

Thus, from the aforementioned assumptions about different components of revenue and expenditures, the derived primary deficit stands at 2.56 per cent of GDP, which includes existing spending on the ICDS, MDM Scheme and food subsidy. Spending on the ICDS, MDM Scheme and food subsidy from 2007–08 to 2011–12 was 1.06 per cent of GDP. Consequently, the primary deficit excluding the ICDS, MDM Scheme and food subsidy spending stood at roughly 1.5 per cent of the GDP. Therefore, to assess the fiscal implication of the NFSA 2013 in terms of projecting the debt–GDP ratio, it is assumed that the primary deficit excluding spending on the ICDS, MDM Scheme and food subsidy will remain fixed at 1.5 per cent of GDP. The additional projected spending on the NFSA 2013 will be added to the baseline 1.5 per cent of the primary deficit–GDP ratio to arrive at the modified primary deficit.

5. ADDITIONAL FINANCIAL BURDEN OF THE NFSA 2013

At present, to maintain the country’s existing food security system, the central and state governments together spent ₹ 77,093 (RE) crore in 2011–12, an over six-fold increase from the ₹ 12,500 crore spent in 2000–01 (Government of India, 2013). Expenditure under the ICDS (for the overall development of children below the age of 6 years and proper nutrition and health care of pregnant and lactating mothers) has increased from ₹ 8,181.72 crore during 2009–10 to ₹ 11,176⁸ crore in 2011–12. Similarly, under MDM Scheme, expenditure has increased substantially from ₹ 5,835 crore in 2007–08 to ₹ 9,902⁹ core in 2012–13. Thus, while computing the additional cost of implementing the Act, one should take note of programme-specific spending under existing food security and welfare schemes, as the fiscal sustainability of the Act essentially depends on whether the additional expenditure would be fiscally sustainable or not in terms of the debt–GDP ratio criterion.

To project the future expenditure for different beneficiary groups under the Act, we need to compute the number of intended beneficiaries in future and associated costs for each group of beneficiaries. Based on the Act, Table A1 in Annexure I provides information about different targeted and beneficiary groups and their entitlements. Computation of the financial burden from different targeted groups under the Act is based on the following steps: First, compute the projected number of PHH beneficiaries in the rural and urban areas including AAY households, children aged 6 months to 6 years, and children aged 6 to 14 years, pregnant and lactating mothers, destitute, homeless and such other needy persons as defined by the NFSA, and their corresponding food grain requirements and cash subsidy. Second, compute the aggregate financial burden under the NFSA entitlement and then the additional fiscal-financial burden.

5.1 Assumptions

The NFSA 2013 coverage of 75 per cent of rural and 50 per cent of urban populations including the existing 2.5 crore AAY households in 2012 will remain fixed for the projection period.

The issue price (IP) of food grain to PHH and AAY households will remain fixed till the end of the projection period. The food grain subsidy is the difference between the economic cost (EC) which includes the minimum support price (MSP), storage, transportation, etc., and the IP, so subsidy = EC – IP. The EC of rice and wheat are assumed to increase by 10 per cent annually over the projection horizon (based on the assumption of Gulati et al. [2012]). The shares of rice and wheat off take through the PDS remain the same at 58 per cent and 42 per cent (based on the Gulati et al. [2012] study).

The estimate of annual per capita food grain requirement for children aged 6 months to 6 years (including malnourished children) and aged 6 to 14 years remains fixed (as estimated by Kannan (2012)).

The share of pregnant and lactation mothers in the female population aged 15 to 49 years will remain the same based on Census 2011 and their annual per capita food grain requirement will remain the same as estimated by Kannan (2012).

The proportion of destitute and homeless population in the total population will remain fixed at 0.26 per cent (based on Census 2011) till the end of the projection of horizon.

5.2 Baseline Fiscal Implications of the NFSA 2013

The total financial burden of implementing the NFSA 2013 in 2013–14 would be ₹ 173,316 crore, which is substantially higher than the sum of total expenditure of ₹ 98,171 crore on the ICDS, MDM Scheme and food subsidy taken together in 2012–13 (R. E). The additional expenditure needed to implement the NFSA 2013 stands at ₹ 75,145 crore and the modified primary deficit–GDP will increase from 2.56 per cent to 3.19 per cent in 2013–14 and would be consistently higher than 2.56 per cent till 2017–18. Consequently, the debt–GDP ratio will jump from 70 per cent in 2012–13 to 72.35 per cent in 2018–19, a quantum jump of more than 2 percentage points which would impose a modest fiscal burden. However, the increase in the debt–GDP ratio would not be explosive as it will decline from 2021–22 onwards to reach the current debt–GDP ratio of around 71 per cent by 2030–31. The decline in the debt–GDP ratio from 2021–22 onwards will be a result of a decline in the modified primary deficit–GDP (Table 3).

6. SENSITIVITY ANALYSIS

The fiscal implications of the NFSA 2013 are sensitive to the key assumptions on the productivity growth rate, interest rates on government borrowing and primary deficit–GDP ratios. We assume that the inflation rate is fixed at benchmark year (5 per cent) and simulate the projected debt–GDP ratio for alternative values of primary deficit–GDP (1.25 and 1.75 per cent), productivity growth rates (5 and 6 per cent) and interest rates on government borrowing (8.5 per cent). The results of the simulated debt–GDP ratios are presented in Table 4. For given values of the productivity growth rate and interest rate, primary deficits that are lower than the baseline would lower the projected debt–GDP ratio and vice versa. On the other hand, for a given value of the primary deficit–GDP, lower productivity growth rates and higher interest rates on borrowings would be detrimental in terms of a higher projected debt–GDP ratio and vice versa.

A lower primary deficit–GDP (1.25 per cent) than the baseline value (1.5 per cent) is assumed due to ongoing fiscal reforms initiated to augment revenue and contain unproductive non-plan, non-developmental expenditure by the government in recent years. Moreover, the provisions of the Act to revise the issue price of food grains after 2015–16, to dispel the fear that the cost of implementing the Act would jump substantially as expressed by some prominent researchers like Gulati et al. (2012), would certainly reduce the financial burden and keep primary deficits under check. In contrast, fiscal slippage due to political compulsion against revising the issue price upward, similar to the fixing of the issue price for AAY beneficiaries since 2002, or the inclusion of more beneficiaries and more generous provisions under the Act as demanded by the National Advisory Council in 2011 for a comprehensive food security right, would give rise to a higher primary deficit–GDP (1.75 per cent) than the baseline value. The results show that, for lower primary deficits at 1.25 per cent of GDP, the projected debt–GDP ratio would increase slightly and from 2020–21 on would fall below the current level. However, the higher primary deficits would have explosive effects on the debt–GDP ratio and make public debt unsustainable. Therefore, containing the primary deficits/GDP below 1.5 per cent of GDP is essential if the Act is to be fiscally sustainable in future.

Table 3
Projected Fiscal Implication of the NFSA 2013: 2013–14 to 2030–31

Year Subsidy for PHH +AAY
Spending for Children
Spending for Destitute and Homeless
Spending for Pregnant and Lactating Mother
Total Financial Burden of NFSA
Financial Burden of NFSA/GDP
Modified Primary Deficit/GDP
Baseline Projection Debt–GDP Ratio

(₹ crore) (%)

2013–14 103,566 49,536 630 19,585 173,316 1.69 3.19 70.67

2014–15 105,981 50,056 645 19,887 176,569 1.53 3.03 71.15

2015–16 108,242 50,598 659 20,148 179,647 1.39 2.89 71.69

2016–17 110,557 51,139 673 20,413 182,782 1.27 2.77 72.09

2017–18 112,927 51,666 688 20,680 185,961 1.15 2.65 72.35

2018–19 115,354 52,156 703 20,952 189,165 1.05 2.55 72.51

2019–20 117,839 52,599 718 21,229 192,386 0.95 2.45 72.56

2020–21 120,132 53,068 733 21,447 195,380 0.86 2.36 72.65

2021–22 122,478 53,487 747 21,667 198,379 0.79 2.29 72.66

2022–23 124,877 53,862 763 21,891 201,393 0.71 2.21 72.60

2023–24 127,333 54,206 778 22,116 204,433 0.65 2.15 72.47

2024–25 129,846 54,529 794 22,344 207,512 0.59 2.09 72.29

2025–26 132,137 54,889 809 22,523 210,358 0.54 2.04 72.18

2026–27 134,480 55,225 824 22,702 213,231 0.49 1.99 72.04

2027–28 136,877 55,536 839 22,884 216,136 0.44 1.94 71.85

2028–29 139,328 55,823 855 23,067 219,073 0.40 1.90 71.62

2029–30 141,837 56,086 871 23,252 222,046 0.37 1.87 71.37

2030–31 144,093 56,399 886 23,379 224,757 0.33 1.83 71.09

Year	Subsidy for PHH +AAY	Spending for Children	Spending for Destitute and Homeless	Spending for Pregnant and Lactating Mother	Total Financial Burden of NFSA	Financial Burden of NFSA/GDP	Modified Primary Deficit/GDP	Baseline Projection Debt–GDP Ratio
2013–14	103,566	49,536	630	19,585	173,316	1.69	3.19	70.67
2014–15	105,981	50,056	645	19,887	176,569	1.53	3.03	71.15
2015–16	108,242	50,598	659	20,148	179,647	1.39	2.89	71.69
2016–17	110,557	51,139	673	20,413	182,782	1.27	2.77	72.09
2017–18	112,927	51,666	688	20,680	185,961	1.15	2.65	72.35
2018–19	115,354	52,156	703	20,952	189,165	1.05	2.55	72.51
2019–20	117,839	52,599	718	21,229	192,386	0.95	2.45	72.56
2020–21	120,132	53,068	733	21,447	195,380	0.86	2.36	72.65
2021–22	122,478	53,487	747	21,667	198,379	0.79	2.29	72.66
2022–23	124,877	53,862	763	21,891	201,393	0.71	2.21	72.60
2023–24	127,333	54,206	778	22,116	204,433	0.65	2.15	72.47
2024–25	129,846	54,529	794	22,344	207,512	0.59	2.09	72.29
2025–26	132,137	54,889	809	22,523	210,358	0.54	2.04	72.18
2026–27	134,480	55,225	824	22,702	213,231	0.49	1.99	72.04
2027–28	136,877	55,536	839	22,884	216,136	0.44	1.94	71.85
2028–29	139,328	55,823	855	23,067	219,073	0.40	1.90	71.62
2029–30	141,837	56,086	871	23,252	222,046	0.37	1.87	71.37
2030–31	144,093	56,399	886	23,379	224,757	0.33	1.83	71.09

Source: Author’s computation.

Table 4

Projections of the Debt–GDP Ratio under Different Values of Productivity Growth (P), Interest Rate (r) and Primary Deficits/GDP (pd)

Year	Projected Debt–GDP Ratio for Alternative Primary Deficits/GDP		Projected Debt–GDP Ratios for Alternative Interest Rates, Productivity Growth Rates and Primary Deficits/GDP
Year	P = 5.5, r = 8.2, pd = 1.25	P = 5.5, r = 8.2, pd = 1.75	P = 5, r = 8.5, pd = 1.25	P = 6, r = 8.5, Pd = 1.25
2013–14	70.42	70.92	71.01	70.30
2014–15	70.66	71.64	71.83	70.44
2015–16	70.97	72.42	72.69	70.64
2016–17	71.14	73.04	73.39	70.70
2017–18	71.18	73.52	73.96	70.65
2018–19	71.13	73.89	74.39	70.49
2019–20	70.97	74.14	74.71	70.25
2020–21	70.86	74.43	75.07	70.04
2021–22	70.68	74.64	75.33	69.77
2022–23	70.43	74.76	75.50	69.43
2023–24	70.12	74.82	75.61	69.04
2024–25	69.76	74.81	75.65	68.60
2025–26	69.48	74.89	75.76	68.25
2026–27	69.16	74.91	75.82	67.85
2027–28	68.81	74.88	75.83	67.42
2028–29	68.43	74.82	75.80	66.97
2029–30	68.02	74.72	75.73	66.49
2030–31	67.59	74.59	75.63	66.00

Source: Author’s computation.

Finally, Table 4 reports whether a higher interest rate (8.5 per cent) with lower (5 per cent) and higher (6 per cent) productivity growth than the baseline, and fiscal reforms (pd = 1.25 per cent) would be fiscally sustainable or not. The results show that a higher interest rate and lower productivity growth, even with fiscal reforms, would not be enough to restore fiscal sustainability if the NFSA 2013 is implemented. However, higher productivity growth (6 per cent) with higher interest rates accompanied by fiscal reforms would be fiscally sustainable.

7. MAJOR CONCLUSION AND IMPLICATIONS

The major conclusions of the study are as follows. First, the fiscal implications of the NFSA 2013 under the baseline scenario do not show explosive growth in the debt–GDP ratio till the end of the projection horizon 2030–31, and hence the Act might be fiscally sustainable. However, the projection of the debt–GDP ratio with implementation of the Act shows a modest increase till 2021–22 and then a decline to the initial debt–GDP ratio. The dynamics of the projected debt–GDP ratio under the baseline scenario are mainly shaped by the provisions of the Act and the underlying demographic factors in the country during the projection horizon. A decline in the child population, both in absolute numbers as well as in its share in the total population, would substantially reduce the future fiscal burden of the Act. Growing rural-to-urban migration will cause a decline in the share of intended beneficiaries under the PHH category in the total population from about 67 per cent in 2013–14 to about 64 per cent in 2030–31. Such a demographic transition would reduce the modified primary deficit–GDP ratio which would ensure fiscal sustainability.

Second, the projected debt–GDP ratio under different scenarios of sensitivity analysis show mixed results on the fiscal implication of the NFSA 2013. Of the four results from the sensitivity analysis, two indicate fiscal unsustainability, with important pointers for policy recommendations. The results of the sensitivity analysis suggests that if the Act is to be fiscally sustainable, policy correction like periodic upward revisions in the issue price of food grains are essential to keep primary deficits below 1.5 per cent of the GDP while maintaining productivity growth rate at 5.5 per cent and the interest rate below 8.5 per cent. Any fiscal slippage due to political compulsions over not revising issue prices, a more generous provision and inclusion of more beneficiaries as originally demanded by the NAC in 2011 would be fiscally challenging to implementing the Act in its full spirit.

Footnotes

Acknowledgements

This article is based on my ongoing PhD at the ISEC, under the supervision of Professor M R Narayana under the ICSSR Institutional Doctoral Fellowship scheme. Grateful thanks are due to Dr Elumalai Kannan for valuable comments and suggestions on the article. I also acknowledge comments and suggestions from the anonymous referee, which have been instrumental in helping me revise this article. However, the usual disclaimer applies.

SALIENT FEATURES OF NFSA,2013

The NFSB 2013, has merged the concepts of a priority household (PHH) and general household (GHH), which were identified separately in the NFSB 2011,¹⁰ to simplify the identification of beneficiaries. The beneficiaries indentified under PHH are entitled to receive, per month, 5 kg of food grains at a price of ₹ 3, 2 and 1 for rice, wheat and coarse grains, respectively. The individuals of Antyodaya Anna Yojana (AAY) households will receive additional 10 kg per month to protect their existing allocations. The other provisions of the Bill are to provide guaranteed nutritional supports to special groups like pregnant and lactating mother (PLM); children aged 6 months to 6 years and 6 years to 14 years, destitute and homeless persons, people affected by disaster, calamities and people living under starvation. Rest of the provisions under the NFSB, 2013 to other and special groups remains broadly same as in NFSB, 2011. The parliament has passed the NFSB, 2013 in its present form to make it Act on 12 September 2013 and named it as National Food Security Act (NFSA), 2013. The detailed provision of entitlements for different group of population under NFSA 2013 is provided in Table A1.

DATA AND VARIABLE DESCRIPTIONS

Table A2 summarises the description, measurement and data sources of different fiscal and non-fiscal variables used to compute the additional financial burden of the NFSA 2013 and the projection of the debt–GDP ratio under different scenarios to assess the fiscal implications of the Act.

Notes

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